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Business News/ Companies / News/  Firms withhold investments on inflation worries

Firms withhold investments on inflation worries

Persistent inflation may be making companies cautious about new investments, leading to a slowdown in capital expenditure

Firms withhold investments on inflation worriesPremium
Firms withhold investments on inflation worries

Persistent inflation may be making companies cautious about new investments, leading to a slowdown in capital expenditure.

Reserve Bank of India (RBI) deputy governor Michael Patra expressed such a concern in his statement at the December meeting of the monetary policy committee. Inflation expectations, Patra said, may be causing companies to hesitate on investments, as reflected in corporate performances during the September quarter.


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While inflation expectations have trended lower in recent months, experts are concerned that companies might be unwilling to invest even at the current level. Businesses have mildly lowered their one-year ahead inflation expectations to 4.76% in October from 5.09% in August and 4.83% in July.

Monetary policy committee member Shashanka Bhide cited numbers from the Business Inflation Expectations Survey of the Indian Institute of Management-Ahmedabad (IIM-A) to point to the slight moderation.

The survey, according to IIM-A, provides ways to examine the amount of slack in the economy by polling a panel of business leaders about their inflation expectations in the short and medium term. The monthly survey asks questions about year-ahead cost expectations and the factors influencing price changes, such as profit and sales levels, among others.

High inflation limits consumer demand, making it difficult for companies to generate returns on investment.

According to RBI research, growth can be affected when inflation exceeds 6%. Given that inflation is not expected to fall significantly below 6% until the June quarter, concerns about private investment are justified, said an economist on condition of anonymity.

“While companies typically start expanding capacities when utilization reaches 80%, it should be seen alongside the metrics of growth, stability and inflation," the economist said.

The government, along with the private sector, has announced fresh capex projects worth 3.59 trillion in the three months to September against 5.17 trillion in the preceding three months, showed data from Centre for Monitoring Indian Economy.

Monetary policy panel member Jayanth Varma in the minutes of the December meeting, pointed to anecdotal evidence that suggests concerns about growth prospects are deterring capital investment even by firms that have reached more than 80% capacity utilization. While private consumption has remained buoyant, it remains to be seen how much of this is due to pent-up demand, which could dissipate over the coming months.

Economists pointed to the prevailing uncertainty as possible reason companies might be in a wait-and-watch mode before committing to more investments.

“Given that companies would look at a five-year forward horizon, high inflation expectations tend to impact their investment decisions. New project decisions could also get stalled owing to recession in the West," said Madhavi Arora, lead economist at Emkay Global Financial Services.

Arora said considering how uncertain things are at the moment, India’s inflation trajectory cannot be seen in isolation.

While inflation is expected to decline to 4% at some point, she said, there is no clarity yet on when it will remain anchored in that band.

The central bank has slightly raised its inflation projections for the December and March quarters of the current financial year and retained the full-year forecast at 6.7%.

It has now projected inflation in the December quarter at 6.6% and at 5.9% in the March quarter.

Consumer Price Index (CPI) inflation for Q1 of the next financial year is expected at 5% and 5.4% in Q2, assuming a normal monsoon.

“Inflation may be slightly down, but it is certainly not out. If anything, it has broadened and become stubborn, especially at its core," said an article in the Reserve Bank’s December bulletin.

Although the central bank noted that decreasing input costs, strong sales, and increased investment in fixed assets are contributing to a recovery in capital expenditure, it warned that financial conditions, including high borrowing costs, are undermining discretionary consumer spending and housing demand, and hindering investment in new capacity.

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Shayan Ghosh
Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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Published: 30 Dec 2022, 11:18 PM IST
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